TEXMACO RAIL & ENGINEERING Bright outlook

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1 India Midcaps RESULT UPDATE TEXMACO RAIL & ENGINEERING Bright outlook India Equity Research Infrastructure - Railways Texmaco Rail & Engineering s (Texmaco) Q2FY18 revenue plummeted 49% YoY as GST uncertainty impacted execution in the EPC arm; in addition, lack of wagon orders led to wagon revenue sustaining tepid trend. EBITDA margin fell to 0.1% versus 5.0% in Q2FY17 due to operating de-leverage. Texmaco Group s order book at Q2FY18 end stood at ~INR36bn; the upcoming Indian Railways (IR) tender for 9,500 wagons and rising opportunities in coaches, locomotives & EPC segments are expected to result in substantial order inflows for the company. We expect order intake to drive stock performance going ahead. Maintain BUY with SOTP-based target price of INR140. Tepid order inflow derails wagon business Texmaco s wagon order book and, consequently, revenues have plummeted over the past 18 months due to absence of sufficient wagon orders. Wagon dispatches at 316 in Q2FY18 fell 50% YoY. Despite a slight revival in private sector ordering, the company s overall wagon order book declined to INR2.1bn due to falling share of IR orders. Texmaco is eyeing the IR tender for 9,500 wagons (expected to be finalised in November) as well as DFC wagon orders expected in FY19 to shore up its order book. GST uncertainty takes a toll on EPC division Rail EPC division s revenue, at INR955mn, declined 26% YoY in Q2FY18 due to disruption in procurement and correspondingly billing on introduction of GST. Its order book stands at a healthy ~INR18.7bn (3.8x TTM revenues). Work on the 2 DFC orders has commenced and we expect this to boost execution going ahead. Outlook and valuations: Attractive; maintain BUY Burgeoning investments in IR ( Indian Railways - Re-birth of the Colossus ) entail bright prospects for Texmaco s primary business lines wagons, coaches, locomotives and rail EPC. We believe, rising exposure to rail EPC business will materially change the company s risk profile, pruning its dependence on the wagon segment. Moreover, the proposed amalgamation with Bright Power will enable Texmaco to become a total rail solution provider. Our SOTP value for Texmaco works out to INR140, based on P/E of 25x FY19E earnings of Texmaco and Bright Power. We maintain BUY recommendation. Financials Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E Revenues 1,919 3,773 (49.1) 2,275 (15.7) 11,542 9,352 15,963 EBITDA (99.4) (49) NA ,662 Adj. profit (83) 182 NA (86) NA ,149 Dilu.EPS (INR) (0.4) 0.9 NA (0.4) NA Dilu.P/E (x) * 57.8 NA 17.3 EV/EBITDA (x) * 33.0 NA 12.8 ROAE (%) * adjusted for Bright Power EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: TEXA.BO, B: TXMRE IN) CMP : INR 99 Target Price : INR week range (INR) : 118 / 83 Share in issue (mn) : M cap (INR bn/usd mn) : 22 / 336 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q1FY18 Q4FY17 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock Edelweiss Securities Limited : NIL Stock over Index 1 month 0.3 (0.5) (0.8) 3 months (1.2) 12 months 19.1 (9.1) (28.2) Parvez Akhtar Qazi parvez.qazi@edelweissfin.com October 24, 2017

2 No. of wagons dispatched Private sector share (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 H1FY18 (INR bn) Infrastructure - Railways Other highlights Wagon order book at Q2FY18 end stood at INR2.1bn (with IR wagon share at INR50mn) Chart 1: Wagon order book witnessing downturn Wagon order book Wagon revenues Wagon dispatch During the quarter, Texmaco dispatched 231 wagons to IR and 85 wagons to the private sector. Chart 2: Wagon dispatch still weak compared to previous years 4, , , , FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 H1FY18 IR Non-IR Share of non-ir wagons (RHS) Source: Company, Edelweiss research Texmaco s revenues (ex-kalindee) have been falling due to dearth of wagon orders; consequently, the steel foundry topline has also dipped. Going ahead, the company expects that rail EPC division will boost its revenues. 2 Edelweiss Securities Limited

3 Order book (INR nm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 H1FY18 (INR bn) Texmaco Rail & Engineering Chart 3: Wagon slowdown pulls down the standalone business Wagons HME Steel Foundary Kalindee Others Source: Company, Edelweiss research Order book At the end of H1FY18, the Texmaco group order book stood at ~INR36bn with Bright Power contributing ~INR5.6bn. Chart 4: Rail EPC dominates Texmaco standalone order book 35,000 28,000 21,000 14,000 7,000 0 FY13 FY14 FY15 FY16 FY17 Q2FY18 Rolling stock HME Steel foundry & others Kalindee Source: Company, Edelweiss research Locomotive business: Incremental push towards electric traction implies significant jump in production of electric locomotives going ahead. Texmaco, which manufactures electric loco shells, will benefit from this. Texmaco is also likely to benefit from orders for locomotive components to be given by both GE and Alstom (as part of the new loco factories being developed in the country). Coach manufacturing: Increasing focus on safety means that IR is likely to move away from ICF coaches to LHB coaches. With not enough capacity in the public sector to meet the demand for LHB coach production, some orders are likely to come to the private sector. Texmaco, with established credentials in this space, will benefit from this. 3 Edelweiss Securities Limited

4 Infrastructure - Railways Coach refurbishment: With IR looking to involve private sector in coach refurbishment, experienced players like Texmaco will benefit. The 1 st tender for coach refurbishment is already underway and the company expects it to get awarded shortly. Track laying: News reports indicate that IR will spend INR10bn a month over the next six months to replace old and out-of-date tracks with new ones, an exercise aimed at reducing train derailments. Mr. Piyush Goyal, Minister of Railways, has ordered the spend after raising the track renewal target for the current fiscal to 3,600 km, an 80% jump over the average 2,000 km of tracks renewed by IR every fiscal. We believe this will improve growth prospects for the company s rail EPC division. Merger of Bright Power and Texmaco Hi-Tech: The company s Board of Director have approved the amalgamation of its subsidiaries Bright Power Projects (India) (in which the company currently holds 55% stake) and Texmaco Hi-tech (wholly owned subsidiary) with the company. The share exchange ratio approved is 818:100, i.e., 818 shares of the company shall be issued for every 100 shares held by a shareholder in Bright power. With Texmaco Hi-Tech being a wholly owned subsidiary, no shares need to be issued and the company s investments, being equity shares, in Texmaco Hi-tech will stand cancelled. Bright Power currently has 13mn shares. Considering the share exchange ratio, Texmaco will need to issue additional 4.78mn shares to the holders of Bright Power. Considering the current equity base of 219mn shares of Texmaco, this will result in ~2.2% dilution for the company. We believe the additional stake acquisition in Bright Power is positive for the company. Bright Power offers a complete package in design, supply, construction & installation for railway electrification and installation of transformers and substations (mainly for IR). While IR was its main customer traditionally, it has successfully diversified into the metro rail space and recently has received an INR2bn order from Power Grid (PGCIL) as well. Its order book has improved from INR3.6bn at Q1FY18 end to INR5.6bn now. With IR s increasing focus on electrification ( Mission Electrification gaining traction ), prospects for Bright Power are improving. 4 Edelweiss Securities Limited

5 Texmaco Rail & Engineering Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E Net revenues 1,919 3,773 (49.1) 2,275 (15.7) 4,194 9,352 15,963 Direct costs 1,604 3,255 (50.7) 2,032 (21.0) 3,636 7,942 12,896 Staff costs Other expenses (13.5) Total expenditure 1,918 3,585 (46.5) 2,324 (17.5) 4,242 9,111 14,301 EBITDA (99.4) (49) (102.2) (48) 241 1,662 Depreciation (1.1) EBIT (43) 149 NA (93) NA (137) 64 1,464 Other income (62.3) 104 (32.4) Interest (7.9) Add: Prior period items Add: Exceptional items Profit before tax (91) 207 NA (98) NA (189) 28 1,438 Provision for taxes (8) 25 NA (11) NA (19) Reported profit (83) 182 NA (86) NA (169) 23 1,149 Adjusted Profit (83) 182 NA (86) NA (169) 23 1,149 as a % of net revenues Direct costs Other expenses EBITDA (2.1) (1.1) Reported profit (4.3) 4.8 (3.8) (4.0) Tax rate Edelweiss Securities Limited

6 Infrastructure - Railways Company Description Texmaco, incorporated in 1939, started out as a textile machinery manufacturing company. Over the years, it has diversified into the heavy engineering segment which includes wagon manufacturing, hydro mechanical equipment, bridges and structural equipment, steel foundry and process equipment. The company went private in 1998 as Texmaco Machines Private Limited and later in 2010 the company got demerged into 2 entities - Texmaco Infrastructure & Holdings (Texinfra) and Texmaco Rail & Engineering (Texmaco). The company s major segments are i) Manufacture and supply of wagons ii) Hydro mechanical equipment iii) Steel foundry division and bridges and structural equipment. In FY14, the company acquired ~49% stake in Kalindee Rail Nirman, which is in the business of providing EPC services to railways & metros which has been merged with the company itself. Texmaco has also acquired 55% stake in Bright Power Projects (India), an EPC company, specialising in over head electrification (OHE) solutions for IR. Investment Theme Impressive track record in wagon segment Over the past 6 decades, Texmaco, has cemented its position as the premier wagon maker in India. To counter the slowdown in wagon ordering from IR, the company has prudently utilised its design/engineering capabilities, developed from technical collaboration with renowned MNCs, to win private sector/export orders, which entail production of custom made commodity-specific wagons. This places Texmaco in pole position to benefit from the upcoming rolling stock orders from DFC. Transforming into a total rail solution provider To insulate itself from rising competition in the wagon segment, Texmaco acquired Kalindee Rail (undertakes turnkey/epc jobs in rail infra segment) and Bright Power (specialises in electrification solutions). This will enable the company to capture larger pie of the huge investments being done for augmenting the rail network in the country. In addition, its tie ups with global players like Wabtec, etc., have enabled it to widen product portfolio and offer full spectrum of services required in the railway space. Key Risks Concentration risk Currently, wagon segment drives majority of Texmaco s profitability. Ergo, slowdown in wagon ordering from IR has marred the company s turnover. Prolonged slowdown in the wagon space could cast a shadow on its growth plans. Predatory pricing by new entrants The number of players competing in the wagon industry has increased over the years. With wagon ordering sluggish, increased competition has affected Texmaco s margins. Continuation of the same can keep its operating margins subdued. New growth ventures yet to yield results Texmaco has adopted the acquisition and tie up mode to improve its product profile and in turn its growth path. But, the company s strategy has still to play out completely. Hence, any requirement of additional capital could strain its balance sheet. 6 Edelweiss Securities Limited

7 Texmaco Rail & Engineering Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Order intake (INR bn) Y-o-Y growth (%) 13.3 (12.9) (4.4) 74.5 Book-to-bill ratio (x) Order backlog (INR bn) Order backlog growth (%) Revenue growth (% yoy) (19) 71 Raw Material (% net rev) Employee (% of net rev) Job work (as % of sales) Other admin (% net rev) Avg. Interest rate (%) Depreciation rate (%) Tax rate (%) Dividend per share Inc. in invts (INR mn) (660) (414) Capex (INR mn) (1,072) Incremental debt 2,281 (114) 1, Income statement (INR mn) Income from operations 10,766 11,542 9,352 15,963 Direct costs 8,950 9,468 7,942 12,896 Employee costs Other Expenses Total operating expenses 10,259 10,958 9,111 14,301 EBITDA ,662 Depreciation EBIT ,464 Add: Other income Less: Interest Expense Add: Prior period items Profit Before Tax ,438 Less: Provision for Tax Prior Period(Net of Tax) Reported Profit ,149 Adjusted Profit ,149 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics Operating expenses EBITDA margins Net Profit margins Growth ratios (%) Revenues (19.0) 70.7 EBITDA (58.7) PBT (93.4) NA Adjusted Profit (93.5) NA EPS (93.5) NA 7 Edelweiss Securities Limited

8 Infrastructure - Railways Balance sheet (INR mn) As on 31st March FY16 FY17 FY18E FY19E Share capital Reserves & Surplus 8,899 10,233 10,255 11,405 Shareholders' funds 9,109 10,452 10,475 11,624 Short term borrowings 1,015 3,218 4,318 5,268 Long term borrowings Total Borrowings 1,084 3,241 4,391 5,341 Long Term Liabilities Def. Tax Liability (net) 85 (360) (360) (360) Sources of funds 10,375 13,817 14,986 17,090 Gross Block 3,652 2,680 3,080 3,630 Net Block 2,139 2,432 2,655 3,007 Capital work in progress Intangible Assets Total Fixed Assets 2,178 2,474 2,720 3,071 Non current investments 2,078 1,644 2,469 2,469 Cash and Equivalents 3,545 3,842 4,719 3,892 Inventories 2,748 2,270 2,082 3,218 Sundry Debtors 2,243 4,374 3,569 6,052 Loans & Advances 1, Other Current Assets 39 2,775 2,828 2,882 Current Assets (ex cash) 6,688 9,910 8,878 12,833 Trade payable 2,618 2,445 1,986 3,180 Other Current Liab 1,495 1,608 1,814 1,996 Total Current Liab 4,113 4,053 3,800 5,176 Net Curr Assets-ex cash 2,575 5,857 5,078 7,658 Uses of funds 10,375 13,817 14,986 17,090 BVPS (INR) Cash flow metrics Operating cash flow (715) (189) 912 (1,290) Investing cash flow (1,209) (550) Financing cash flow 10 (114) 1, Net cash Flow (209) (160) 853 (890) Capex (184) (262) (423) (550) Dividend paid (63) (63) (63) (63) Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity (0.3) (0.1) Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Free cash flow (INR mn) Reported Profit ,149 Add: Depreciation Interest (Net of Tax) Others (449) (433) (411) (508) Less: Changes in WC 1, (775) 2,575 Operating cash flow (715) (189) 912 (1,290) Less: Capex Free Cash Flow (899) (451) 489 (1,840) Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) (93.5) 5,000.1 Adjusted Cash EPS (INR) Diluted P/E (x) * NA 17.3 P/B (x) * EV / Sales (x) * EV / EBITDA (x) * NA 12.8 Dividend Yield (%) * adjusted for Bright Power Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E Texmaco Rail & Engineering Titagarh Wagons Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 Texmaco Rail & Engineering Additional Data Directors Data Mr. Saroj Kumar Poddar Executive Chairman Mr. Akshay Poddar Non - Executive and Non Independent Director Mr. D. H. Kela Executive Director & CEO (SF) Mr. Sandeep Fuller Executive Director & CEO (HED) Mr. A. K. Vijay Executive Director & CFO Mr. A. C. Chakrabortti Independent Director Mr. D. R. Kaarthikeyan Independent Director Mr. Sunil Mitra Independent Director Mr. Sabyasachi Hajara Independent Director Ms. Mridula Jhunjhunwala Independent Director Mr.V K Sharma Independent Director Auditors - K. N. Gutgutia & Co. *as per last annual report Holding Top 10 Perc. Holding Perc. Holding Reliance Capital Trustee Co Ltd 7.03 HDFC Asset Management Co Ltd 5.44 Jupiter Inv Mgmt Group Ltd 4.95 Duke Commerce Ltd 3.42 Canara Robeco Asset Management 2.06 BNP Paribas 1.82 Parvest Equity India 1.61 L&T Investment Management Ltd 1.44 Life Insurance Corporation of India 1.38 ICICI Prudential Life Insurance 0.62 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 07 Apr 2017 Jyotsna Poddar Buy Apr 2017 Jyotsna Poddar Sell Apr 2017 Puja Poddar Sell Apr 2017 Saroj Kumar Poddar (as trustee of Saroj and Jyoti Poddar Holdings Private Trust) Buy Apr 2017 Saroj Kumar Poddar Sell *as per last available data 9 Edelweiss Securities Limited

10 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 (INR) Infrastructure - Railways Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , research@edelweissfin.com Aditya Narain Head of Research aditya.narain@edelweissfin.com ` Coverage group(s) of stocks by primary analyst(s): Infrastructure - Railways Titagarh Wagons, Texmaco Rail & Engineering Recent Research Date Company Title Price (INR) Recos 28-Sep-17 Railways Mission Electrification gaining traction; Sector Update 14-Aug-17 Titagarh Wagons Steady performance; order intake critical; Result Update 10-Aug-17 Railways Award of first ever EPC contract heralds paradigm shift; Sector Update 109 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart Texmaco Rail 10 Edelweiss Securities Limited

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